Doing the Bernanke Twist!

What is hoped to be accomplished with the Twist? Watch fun video then read below:

Plans to flatten the yield curve seemed to have worked for at least one day. Many analysts suggest that Bernanke and company are working to breathe life into the U.S. housing market. Not a bad theory, since signs of “not totally dead” have begun to creep into the headlines so why not give it a shot in the arm? Kind of like getting a shot of oxygen when touring a mine at high altitude in Chile….it helps your brain and body function, but also prevents altitude sickness from knocking you down for the count. And there are signs here and there of a housing market trying to keep standing:

Quote from Jennifer Lee at BMO: Pinch me if this is a dream….U.S. existing home sales unexpectedly jumped 7.7% in August to 5.03 mln units annualized (no revisions to back data). That’s right….sales JUMPED. The % increase was the largest since December and the actual # of sales was the highest since March. Am I pleasantly surprised? Yes. Am I pumped? No. It is doubtful the trend can hold. Given all of the headwinds blowing against the idea of a stronger housing market, me thinks it is safe to say that a full recovery is quite a while away.”

I can believe the financial wizards have ALSO figured out that lower longer term interest rates are good for the biggest borrower out there – the government. The downside is that with rates at these low levels, the duration of a long bond (sensitivity of its price to small changes) is massive….so all of a sudden there’s good money to be made in bonds as long rates fall. This means a wholesale transfer of money by institutional investors into the bond market….having to sell (as we saw on Thursday, September 22nd at the same time) other assets….like gold and commodities to raise the funds to buy the bonds. In anticipation of the FED’s move (somehow, someone always knows ahead of time) we’ve been seeing commodities sell off for several days before the Twist announcement.

The BMO Capital Markets Commodity Price Index fell 5.7% to 191.1 (2003 = 100) in August as it became clear that global economic momentum had weakened. Specifically, data showed that the U.S. and the eurozone economies had slowed to a crawl and markets had to deal with persistent threats to the global economic outlook, including political paralysis on both sides of the Atlantic. Losses were broad-based, with all the sub-indices pulling back on increased risk aversion and, in the case of Agriculture, ample supplies and heightened competition.

I’d argue that it’s more because of these financial dynamics that oil, copper and gold are getting whacked than lack of physical demand for them per se. The economic slowdown has been obvious for months after all, and if you’ve read some of my prior ramblings, it wasn’t “physical” demand keeping oil and metals prices up there…it was hedge funds and investors in general buying synthetic/leveraged ‘commodity-play’ assets. But threat of global recession makes for better headlines and news stories.

In my experience, asset shifts like this by investors are one-time events. Once it’s all done (potential gains are arb’d out) real economic activity will reign supreme.

About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He recently authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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